Long-Term Strategies for Oil Companies: How to Deal with Volatile Oil Prices

 


INSIGHT


  • THE VOLATILITY OF THE OIL PRICE HAS BECOME A MAJOR PROBLEM FOR OIL INVESTORS. IT MAKES IT MORE DIFFICULT TO MAKE LONG-TERM DECISIONS ABOUT WHERE TO INVEST AND HOW TO ALLOCATE FUNDS.
  • THERE ARE NEW MARKET PLAYERS NOW PLAYING A ROLE IN THE ENERGY INDUSTRY. DATA MANAGEMENT AND IT NOW PLAY A KEY ROLE IN DAY-TO-DAY MANAGEMENT. THIS OPENS UP NEW BUSINESS MODELS THAT DID NOT EXIST BEFORE.
  • TIME HORIZONS HAVE BECOME SHORTER.  OIL COMPANIES NEED TO KEEP A LONG-TERM PERSPECTIVE ON WHERE THEY WANT TO GO. YOU NEED TO MAKE ACCURATE PREDICTIONS ABOUT THE FUTURE IN THE HERE AND NOW. IT IS DIFFICULT, BUT NOT IMPOSSIBLE, TO RECONCILE THE TWO.


1. Oil companies could make better use of oil storage facilities.


Geopolitical uncertainties can be managed. One way to do this is to increase storage capacity. Unfortunately, this involves higher costs and more operating effort, since the storage facility must be maintained and serviced. For example, the energy in the storage must be circulated, which costs energy. The site has to be paid for. The infrastructure must be maintained and personnel must be instructed regularly. Repair equipment, spare parts, technical inventory are kept on site. But storing oil does not generate revenue. It is an expense if the oil is not sold. It is important that the price you charge later justifies the storage costs. It may make sense to wait for a buyer who is willing to pay more for the oil later. 

Last year in April, oil prices crashed. That April, we saw traders have a moment of shock because they couldn’t find oil storage when the physical contracts expired. Much more oil was traded than could be stored. Tankers were crossing the blue ocean and it took a few weeks for them to reach the other side of the world. While these tankers were crossing the waters, oil demand dropped precipitously because of the coronavirus. Oil prices fell that April, and at the same time many oil contracts expired and had to be sold. But there were fewer buyers because of the coronavirus and falling demand. This was a self-reinforcing cycle.


2. Natural gas is emerging as the number one energy source on the energy markets. Oil companies may benefit from this development by increasing their involvement in the natural gas sector.


We see greater volatility in the oil price as we approach peak oil. In terms of conventional oil reserves, we have already reached peak oil. There is a shift in oil demand. New players have entered the market and are vying for market share. The power grid is supplied by a mix of natural gas, nuclear, renewables, coal and some oil. But petroleum is no longer the main player in the power grid business. Petroleum competes strongly with renewables, which are often subsidized. This trend will accelerate with the expansion of electricity distribution networks, transmission networks, and especially high-voltage networks. Furthermore, the use of natural gas and electric vehicles will accelerate the move away from oil. Nevertheless, oil will be indispensable in the chemical industry. The decline is particularly pronounced in the North Sea and, to varying degrees, in conventional oil production in the United States. The Keystone pipeline was a major project to provide energy security for North American energy markets. But the stop of the Keystone pipeline by the new U.S. administration marks a turning point in North American energy markets. This will also undermine Alberta’s prospects as an oil exporter. This will have dramatic consequences for the Canadian energy sector, especially for oil sands exploration and discovery.

The share of natural gas in the energy mix for power and heat generation is expected to increase over the next decade. There is a growing use of natural gas in all kinds of industries. We can see the first signs of the natural gas age as more and more gas pipelines are built. Few old pipelines are being mothballed and instead continue to deliver energy to Europe and East Asia. With Nord Stream 1 and 2 in northeastern Europe and Germany, and South Stream in Turkey and southeastern Europe, natural gas exports have become very important in politics. Natural gas exports have slowly taken the place that coal has. In some cases, natural gas has become the main source of energy because some countries, such as Germany, decided to stop generating electricity from nuclear power. This trend accelerated after the Fukushima accident in Japan. Oil companies can expand their cooperation with natural gas producers. They can diversify in the natural gas business. 


3. Oil companies may expand into petrochemical and fuel recovery business.


It is likely that recycling of recycled plastic will come back into focus. There is a great demand for the disposal of recycled plastic waste. There are several ways to process recycled plastics into fuel, including pyrolysis. Much progress has been made in this area in recent years to improve energy efficiency, although pyrolysis still produces residues that must be disposed of. There will likely be further advances in the industry as oil prices begin to rise in the coming quarters. 

The petrochemical industry is likely to receive more attention as oil prices rise because of renewed interest in investing in facilities and funding petrochemical research. This is particularly pronounced when oil prices reach the $100 per barrel threshold, since from that point on oil takes up a larger share of the economy. When energy costs take up a larger share of the economy, there will be an incentive to reduce energy spending and find ways to lower energy costs. The goal will be to do more with less. This will include new petrochemical products, the creation of new combined structures in buildings that realize the full potential of hydrocarbon resources, and the development of new fuel sources.

Superfuels will supercharge our energy future. The great thing about diesel made from recycled plastics is that it is a cleaner fuel compared to conventional diesel. By cleaner fuel, we mean it burns cleaner with less smoke and emits less dioxins and sulfur. In addition, existing oil refineries and downstream operations can be reused to develop and market such fuels.


4. Oil companies could find new uses for offshore platforms.


Many oil platforms that still exist will be mothballed in the coming decades as the rate of production declines. This will be particularly relevant in the North Sea. Furthermore, the North Sea is a region whose coastal areas are densely populated. This means that oil platforms can be used to store CO2, which will also benefit the environment in the long term. In any case, CO2 storage can also be a welcome source of energy. 


5. We should not give up on biofuels (yet).


Biofuel production will most likely gain interest. Biofuels have many of the same characteristics that make oil such a good energy source. Biofuels are seen as alternative energy sources to oil, especially in higher price ranges. Biofuel production is not as competitive as oil in conventional oil production. This has to do with the lower energy return on investment (EROI) of biofuels. It should be noted that the energy ratio (EROI) has dropped dramatically in more recent oil exploration projects, bringing them closer to biofuels. In addition, biofuels can be easily stored and do not have the same energy losses as other energy sources. We are thinking of electric batteries. Biofuels can be used within the existing infrastructure. Refueling stations can also be reused. 

Several companies divested various biofuel projects. The waste-to-fuel (sub)sectors were affected. Algae fuel production was seen as a great hope for future renewal of the hydrocarbon industry. After the 2008 financial crisis, this hope was dashed. The main reasons are that algae cannot be produced fast enough to provide fuel. The prospect of scaling up is rather limited. Commercialization is not seen as an option at the moment.

Algae still consume a lot of energy (and water) resources to produce the fuel. Research does not support large investments in algae fuel technology. Bioengineering has not resulted in algae that can produce quickly and fatten quickly at the same time. The algae fatten quickly, or the algae grow quickly. Doing both at the same time is quite difficult. Algae farming is an energy-intensive process, especially in countries farther from the equator. On the other hand, algae fuel production competes less with agricultural production. With agricultural production and water issues being a concern, algae fuel production makes perfect sense compared to bioethanol production.


6. Conclusion


We have to make decisions based on the information we have. We know that the future is uncertain. At the same time, we are approaching a tipping point. We are reaching a point where every decision we make could be detrimental to our long-term success as a company. Alternatively, any action we take could lead to our future success. 

The key to our future strategy is a robust business model, yet we need the flexibility to change when necessary. We then choose alternative ventures when we need to take the business model in a new direction. This takes time and patience, and we need to keep our eyes and ears open.


Many thanks for the shared interest in the energy world!



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